Vicor Corp (VICR) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to your Vicor 2006 third quarter earnings results conference call.

Throughout this conference all lines will be on listen-only (OPERATOR INSTRUCTIONS).

At this time I'd like to turn the conference over to your host for today's call, Mr. Mark Glazer.

Good afternoon and welcome to Vicor's quarterly conference call.

I'm Mark Glazer, Chief Financial Officer, and with me is our CEO, Patrizio Vinciarelli.

Before we begin, we would like to remind all of you that today's conference call is being recorded and is the copyrighted property of Vicor Corporation.

Any rebroadcast, reproduction or other transmission of this conference call in whole or in part without the prior written consent of Vicor is prohibited.

We would also like to remind you that various remarks that we may make during this call about future expectations, trends, plans and prospects for the Company and its business constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements merely reflect our current beliefs, expectations and estimates, which we share with you during our quarterly conference call.

Actual results may differ materially as a result of risks and uncertainties including those discussed in our quarterly and annual reports filed with the SEC.

A replay of this conference call will be available beginning shortly upon its conclusion through November 6, 2006, by calling 888-286-8010 and using the pass code 54982045.

In addition, a webcast replay of the conference call will be available on the Investor Relations section of the Company's website at www.Vicorpower.com\irwebcast, beginning shortly upon its conclusion.

However, the information we provide during this call is accurate only as of the date of this call.

We undertake no obligation to update any of the statements made during this call, and you should not rely upon them after the conclusion of this call.

We are now ready to begin the Q&A portion of our conference.

I would ask that you limit yourselves to two questions at a time so that everyone gets a chance to ask his or her question.

You may, of course, get back in the queue to ask additional questions.

We will now take the first question.

(OPERATOR INSTRUCTIONS).

Walter Nasdeo, Ardour Capital Investments.

I was wondering if you could give us a little bit of color on -- when you mention here that aside from soft demand for the bricks, the program has for a second time been delayed by six months.

Can you give a little color on what else is going on to cause this delay, please?

As far as we know, this is a delay relating to some technical challenges with the hardware.

It doesn't have to do with our part of the system; it has to do with other parts of the system.

But beyond that I can't really say.

Is it possible, then, to get a geographic breakdown of sales?

We don't provide a detailed geographic breakdown of sales.

I can tell you that geographically in recent quarters we have seen relative strength in Japan and in the U.S. and softness elsewhere.

Steve Smigie, Raymond James.

I just need your comment a little bit on gross margin decline here.

Obviously, you sort of talked about it, I think, a little bit last quarter.

But is that mostly just absorption issues or continued mix issues there, the drop of gross margin, sequentially?

Yes.

Well, there was a very small difference in the margin sequentially.

I would attribute it entirely to the change in the topline.

As you know, we have a good deal of leverage associated with topline growth.

As it happened in this past quarter, that topline growth failed to materialize, then the margin suffers.

And it suffered a little bit, I think it went from 42.9% to 42.5%.

That's correct.

That was pretty much in line with devices protections, once we determined that the revenues for the quarter were going to be a little shy of earliest detections.

Could you give us, given the backlog you have here, the order rate, what sort of sequential revenue growth you might expect for next quarter?

I think you did mention that, assuming demand came back, you would start to see your margin progression again.

So I guess I'm maybe reading into it that revenues have improved.

Is that correct, or am I just reading too much into it?

Well, the book-to-bill in the third quarter improved, and it improved in one way of looking at this, in spite of it being a summer quarter.

But it was still not at the level that would suggest any kind of significant growth in the fourth quarter.

We will have to wait and see as this quarter progresses to be able to determine what change.

Generally speaking, we don't expect a major change one way or the other in the fourth quarter.

Could you tell me if you had, say, at least $1 million of V-I Chip revenue in the quarter?

I can't comment with respect to that.

Jim Bartlett, Bartlett Investors.

On this V-I Chip program, this is a single program that you're talking about that was delayed?

It was primarily one program.

There is an ancillary program which is much less significant that is somewhat umbilically tied to this program.

So, as far as I know, it's from only one program with another corollary program also being delayed.

This is the same program that was delayed by six months last quarter?

That is correct.

Do you have other V-I Chip programs that should start making a contribution in the first half of '07?

Yes, we do.

We actually have other programs of the same customer that are progressing along.

By the way, we don't expect this program to go away; it is just a victim of some delays for, again, reasons other than our own hardware.

So we expect this program to come to fruition, but it has had some setbacks at the customer.

Could you give us a little more understanding of the comments you made?

The chip programs, the V-I Chip programs and Picor -- you said they made progress with product roadmaps in major engagements and key customers.

Are these design wins that they have that you said that those developments may continue topline growth in the second half of '07?

Or could you give us a little more color on that?

I would characterize them as a major tentative design win.

What I mean by that is that we have a very strong position as a contender for business, but it is only a design win once it materializes and it turns into actual revenues.

We are only really going to know that as we get closer to that timeframe.

How many of these programs are you talking about?

Well, the answer to that question would be a function of where we put the cutoff in terms of significance.

There is one very major program.

There are lesser programs at various stages of development.

This is for Picor as well as V-I Chip?

That's correct.

Just on another note, just by industry, with orders up 11% this quarter, is there any industries that standout in a negative or positive way?

We see softness across most segments of the [choice] industry.

As suggested in the press release, as of now we are not the only ones seeing that.

I think if you track what's being reported, as an example, passive component manufacturers or active component manufacturers, manufacturers of power management products; a notable example being [linear] tech.

Recently, there has been some softness in the industry alike.

What are your leadtimes, currently?

Well, they depend on the particular [Powerline].

But generally speaking, they are shorter than they have been.

Capacity is not an issue in the short-term, and leadtimes have come down.

Have they come down to a level where they have been near the bottom in the past?

Well, I don't know that there is any real difference that can be made out of the relationship between our spare capacity and the leadtimes on the one hand, and the bottom of demand cycles on the other hand.

I think that what we saw early and reported at the end of the second quarter has been seen more broadly within the last few months.

I think the jury is still out with respect to the significance of this in terms of being an inventory correction that is perhaps a little more pronounced than might appear to be as of one or two months ago, or something more significant than that.

I think that would be speculative on my part to try and make a guess as to what is going to go.

But, dry speaking, we are prepared to deal with it, irrespective of where it goes; we are planning for success.

We are planning for adoption of our new products in new markets, new applications, irrespective of the short-term cycles.

We believe that's going to be supporting revenue growth and bottom line growth in the medium to long-term.

We are not pessimistic about the short-term.

We are taking a wait-and-see attitude.

Obviously, the cycle has not been all that encouraging in the last four or five months.

I think, if we go back to the beginning of this year, things were much more ebullient in the marketplace and oddly, they have slowed down.

And again, they have not simply slowed down from our prospective.

I think that we are, good or bad, in good company in terms of seeing some slowing.

Time will tell with respect to the significance of that.

Steve Smigie, Raymond James.

I was wondering if you could give us a breakout between first gen and second gen, one or the other increased during the quarter and say a percentage of the brick business?

Well, generally speaking, more and more of our activity relates to second gen; more design wins, more activity.

There hasn't been any significant change with respect to that trend.

There is continued progression toward bricks built on more recent technology.

Would you say that the two are roughly equal at this point?

I would say that the second gen is becoming more and more significant.

But we don't give a precise breakdown.

Could you give some thoughts there on gross margin for the two segments?

Obviously, first gen's been pretty high for a while.

Has the second gen come up to that level?

While I know gross margin fell here a little bit sequentially, were you able to take more cost out just in terms of maybe making the manufacturing process more efficient for second gen?

The cost of our second gen bricks continues to come down.

There is a great deal of opportunity left with respect to further cost reductions.

That's a fundamental development with respect to our expectations of improving margins.

The other development, as we discussed in the past, is topline growth.

So, as I mentioned earlier, when you look at the sequential development within the last quarter, the margin was [off] to a large extent to the revenue change, the revenue change being slightly negative and the margin being slightly negative, negatively impacted pretty much as flat from the prior quarter.

I think what it's going to take for the margin to improve further is a resumption of the positive trend with respect to topline growth.

And when we combine that with the continued cost reduction opportunities, that's the combination that is powerful in terms of significant further improvements in margins and profitability.

Did you see any orders in the quarter for V-I Chip in product categories or applications that are new to you or different from the previous quarters?

I guess basically I'm asking have you found any new applications the V-I Chip applies to in the quarter?

Yes, we found some new applications for V-I Chips.

We are beginning to enable some smaller applications, smaller-volume applications through our Vicor channels, somewhat independently of the (indiscernible) effort that has been going on for some time now in terms of key engagements with blue-chip customers.

I would say that's perhaps one of the most significant recent developments.

As we get a little further along, we're going to be seeing more of that kind of thing.

For the Picor progress that you made, is that in traditional markets such as Telecom?

Or is that something different?

It isn't something I really comment about at this point in time.

A follow-up question -- Can you give any comment if you had any license revenue from V-I Chip this quarter?

No, we did not.

Dick Feldman, Monarch Capital.

In the third quarter compared to the second quarter, was the burden of the losses on the V-I Chip and the Picor operations materially different?

No, it was not materially different.

Are we going to start to see, even though the volume of V-I Chips may be modest initially in '07, will it be to some improving margins as you reduce the losses before you even -- you made reference in the release to some potentially significant volumes in the second half of the year, but I imagine there will be some volume in the first half?

Yes.

To your point, we will be making a significant investment.

There are obviously operating expenses, to some extent negative contributors to the overall gross margins.

But another way of looking at it -- there are investments in the future opportunity for Vicor at large and the new entities we're creating.

To your point, as we get to different phases with respect to the life of these entities and we start seeing significant revenues and contributions to the bottom line, that in and of itself will have significant positive impact on the overall financial performance of the Corporation. 2007 is a year in which -- if things go according to expectations -- there should begin to be significant factor.

[John Dylan].

I wanted to ask you about your hiring.

I noticed on the web page a while ago you had about 36 openings, a lot of engineers and a lot of sales.

I'm wondering if you were -- now the numbers have come down, so I'm wondering if you have filled those positions that you had open or have you put them on hold until the business starts picking up?

We continue to look for the right kinds of talent and, dry speaking, the philosophies that you look for the talent, if it is necessary for the medium and long-term, irrespective of short-term ups or downs, particularly downs, with respect to the economic cycle or the industry cycle.

So there has been no fundamental change with respect to that.

You must say that nationally we may be a little bit more cautious, but we are not refraining from making investments in the power roadmaps or the key people necessary to project them in the marketplace, otherwise you realize the business plans of the Corporation as a whole.

Did you hire the sales guys, in particular, the marketing guys?

I know you had a couple (indiscernible) guys in the automotive industry and I was wondering if they got filled?

We've had major hires in sales and marketing, both the V-I Chip and Picor, in recent times.

We are continuing to look for the right kind of talent to enable us to go after market opportunities that we think are going to be significant in the medium to long-term.

I know you were targeting the automotive, but what about the airlines, too, the people who make the airplanes.

Is that a market for you also?

Yes.

Yes, there's opportunities in aerospace, as an example, for V-I Chips.

So there's many dimensions to the market opportunity for the new generation of products.

I think with the size, weight and power, that would be particularly interesting for you guys.

Yes.

From Italy we have, really, the embossment of choice with respect to market opportunity.

One of our key challenges is to stay focused on those opportunities that -- properly balanced for the short-term, the medium term and the long-term -- there is no shortage of opportunity with respect to leveraging the attributes of the technology.

What about the VIC-in-a-Brick?

I know at one time you were hoping that that would be a little bit quicker.

You've had some significant delays on some of these bigger programs.

But are you starting to see -- are you able to take any bricks business with that VIC-in-a-Brick?

We have taken a second look at that, and we are coming back at it in a way that we think makes more out of the opportunity.

I can't really comment in detail about that at this point in time.

There was a vague reference to that in the recent quarterly conference call with respect to, as I mentioned then, finding ways to leverage the [chipped ecology] in the big business, configural product business opportunity.

Beyond that, all I can say is that we'll be making announcements as soon as we have products to announce.

One other thing, I'd like you to give maybe a little more color on.

Some other people have kind of hit on this but I'm still a little confused.

The way I read the press release, and I don't think this is the way you intended it, but it seemed like the one major program slipped out.

In the statement right behind it, any significant revenues from V-I Chip is going to be six months out, also.

So what the question is is, are you going to be selling some more in the first half?

Is that going to help your topline and bottom-line?

That's really the question, will you see any kind of contributions from V-1 in first half?

Can you comment on how it will affect the top and bottom-line?

We are, in every quarter, making new highs in terms of the level of activity and the number of V-I Chip units being sold, ordered and shipped.

The issue with respect to the major programs has to do with what you might call inflection points that will make for much more dramatic quarterly growth and, in effect, a change in the general state of affairs with respect to these kinds of products and opportunities.

That's an area where, as we reported last quarter and again, unfortunately, this quarter, there have been some postponements that unfortunately have moved some of these inflection points out by some number of months.

Inflection point meaning you'll kind of take it to a whole other level?

Well, inflection point meaning a quarterly change that's much more significant and one that begins to make a significant change in the overall revenue picture of the Company.

Can you tell me or can you tell us approximately how many design [wins] you have for the V-I Chip?

We don't report those numbers.

Ron Opel, Moors and Cabot.

How would you characterize the outlook for additional licensees and marketing partners at this point in time?

Has there been any change in that outlook over the last quarter?

There has been some positive change.

We are involved in a few [pound] negotiations on different fronts relating to licensing opportunities with respect to the V-I Chip (indiscernible).

Steve Smigie, Raymond James.

I was hoping you could talk a little bit about what we might see sequentially in terms of SG&A spending and R&D spending?

There should be a slight increase in overall operating expense levels, both in the R&D and, to some extent, in SG&A line.

Could you talk a little bit about what happened with the tax benefit here and if we expect to see that in Q4?

And a little bit on if you expect to continue to share buyback here in the fourth quarter?

Right now we're looking at a 5% rate for the year.

In the quarter, as the press release indicates, we had a tax year that closed, and we were able to take the $468,000 out of our reserves.

That's a nonrecurring item.

If you'll look back to our third quarter of last year, you'll see the same kind of number coming out.

In fact, I think it was a little bit higher.

So if you're doing whatever analysis you're going to do, if you use 5% for the total year's tax rate, that's what we're estimating currently.

But that's a separate fiscal tax year versus calendar year?

No, that's what we're using for the calendar year.

Any thoughts on the share buyback in this quarter?

Well, as you might have noticed, we bought back quite a bit of stock during the third quarter.

Depending on circumstances, we may be doing similar things, more or less, this coming quarter.

Last question is just -- I'm curious if you had any thoughts on any, maybe, weakness in LCD TV market and if that's impacting you at all?

It hasn't impacted us because we're not, at this point in time, in a production mode or in a situation where we would be impacted one way or the other.

Jim Bartlett, Bartlett Investors.

Quick question -- the headcount at the end of the quarter?

We had about 1,080 people.

That's down about 20 people from the end of the year.

One other -- I noticed on the website you had introduced a new 48-volt bus converter, twice the power and half the size.

Could you just tell me how significant this product and the technology in that product, as far as improving the size [in the powered up state] in general?

Well, generally speaking, V-I Chip technology is far ahead of any competitive product with respect to density, efficiency, speed, low noise -- meaning a quiet power processing performance.

Any of an idea of bus converter, other functional blocks that V-I chip frames enable, all of them deliver similar levels of advanced performance.

Generally speaking, customers find in V-I Chips opportunities to achieve density, efficiency and speed capabilities that are unparalleled in the industry.

The bus converter is an example.

The prior one -- the density was like 1,000 watts per cubic inch.

Is this four times that?

Well, I'm not sure which particular product you are referring to.

I'm not aware of any product we have that is for 1,000 watts per cubic inch.

We have capabilities of [over] 1,000 watts per cubic inch, and we are continuing to advance those capabilities.

[John Dylan]

A couple follow-ups.

Are you selling any V-I Chips to some power supply companies that are in turn building general-purpose power supplies?

Yes.

How is the progress coming using the V-I Chips for the smaller AC adapters?

How is that coming along?

That has progressed more slowly than we had anticipated early in the year.

We have had some limitations in terms of our bandwidth with respect to a variety of technical pursuits and the demands of some large engagements have caused us to put more focus temporarily on particular applications and particular developments in support of those applications.

But those developments are still progressing along, and they are getting back into front-burner status, if you will, with respect to bringing opportunities to fruition.

So you really are prioritizing your opportunities and you really are limited to the amount of opportunities you can chase?

Well, yes, that's always the case.

As I mentioned earlier, we have no shortage of opportunities.

We have the embossment of choice.

From time to time we have to exercise judicious choice with respect to applying resources to those areas that we believe are most leveraged or where we see the better opportunities.

So you're really going after the ones, again, that are most leveraging and expect the biggest returns from, is what it sounds like.

Is that correct?

Generally speaking, yes.

Just from the outside, it seems like it's taking longer than -- at least longer than I expected, to see some more significant revenues from the V-I Chip.

It sounds like you're swimming in opportunities.

Are you losing some of these opportunities, or are just a number of them taking more than you expected?

Or is it just that they're so demanding, because it's a new customer base?

Can you just give us a little color on that?

Well, there's various factors at play.

We're dealing with customers in markets where we historically have not participated.

They have very demanding requirements in many different ways, and we are totally committed to addressing those requirements, sometimes as they evolve.

As projects get closer to fruition there are sometimes changes in requirements that cause us to have to make adjustments and, in some cases, bring about further developments to meet the customer need as it evolves.

So that is a significant factor.

Another significant factor is, from a different perspective, the cycle adoption of a truly disruptive technology that requires customers to do certain things in terms of being able to take full advantage of the technology.

There is a cycle of learning.

There is a cycle of getting comfortable with the technology before applying it to the fullest.

We're seeing that at work with at least some of the major accounts that we're pursuing.

We have, by design, not gone after the traditional accounts, the traditional customer base of the Vicor brick business model.

That may have led to -- early adoption [as] more accounts.

But it was a cautious, proper decision, given the significant opportunities that we see elsewhere, which we want to go after first.

So there are many factors at play that have led to a rate of progress that is frustrating in some respects, disappointing in others but we believe that ultimately leading to complete success.

We are very comfortable with respect to where we are going and the significance of the opportunities that we're pursuing.

We obviously would like to have been able to make it a bit faster than it has, but we're confident that we are getting to where we need to get.

So what I think I really heard was you did make the proper decisions in going after the more significant accounts and we should definitely see a return on that.

It's really -- it sounds like a matter of when and it looks like the second half of next year when we will see a significant increase in revenues and bottom-line growth.

Yes, and it could happen a little earlier than that.

I think we'll have to take a little bit of a wait-and-see attitude but things are progressing along on a number of fronts, and we believe that these are the right kinds of developments that we'll realize the opportunity for this technology and these products.

It sounds like, in the meantime, you're still going to see growth in the V-I Chips.

Assuming the bricks business is at least stable or slightly growing, your revenue still should increase in early 2007.

Is that correct?

We believe that we have growth left in the brick business, both in terms of the tenure of our earlier-generation technologies and, over time, in terms of the opportunity to leverage the new technology within our older business model.

When we look at the combination of those two kinds of opportunities, we think that the Vicor business model has got a lot of potential ahead of itself.

Obviously, the opportunity for the products that were built based on the older generation technology, as we go forward, will diminish.

But we don't expect a decline in those opportunities.

I would remark that, as was asked earlier, and implied by my earlier answer to the question of breakdown between the first generation and second generation products, big products, we're still obviously seeing significant contribution to our topline and bottom-line from our first-generation products, which were, in effect, obsoleted by a second-generation product over ten years ago.

That tenure bodes well for not just continued longevity on the part of the first-generation products but even greater longevity with respect to second-generation products, not to mention the opportunities that come about from deploying in the appropriate way V-I Chip technology within the brick paradigm.

Do you think we can expect some growth in the first and second quarter of next year?

I would think so.

I think that, to some extent, that that's a function of the economic cycle, in particular that part of the economic cycle that actually affects our business -- semiconductor, capital equipment, the kinds of applications that -- more particularly, the brick products that have historically been designed in.

As the year progresses there's going to be a more significant contribution from the new power opportunities associated with V-I Chip technology.

Dick Feldman.

Earlier in the call you talked about some modest volumes of the V-I Chip going through the traditional Vicor channels.

I wonder if you could elaborate on that, particularly as it relates to the early part of '07.

Is this an easier cell than the major initiatives you're working with elsewhere?

It's a different kind of cell.

It's a cell that, up to this point, has been limited for a variety of reasons.

But we're beginning to see some early design wins, and I believe that those are going to bring about more opportunities of a similar kind.

As I mentioned numerous times, by design, that's not been an area of focus but I think it's an area that we're beginning to bring into focus, and just with the last quarter we've seen some early examples of success in that area.

But by its very nature, these are going to be smaller orders?

That's correct.

Very different kind of engagement.

It is not with customers that would demand unique kinds of development, tailored to particular needs.

These kinds of engagements would rely on essentially standard V-I Chip type of solutions.

As more of the building blocks that enable standard V-I Chip solutions become released and generally available, I expect to see proliferation of that kind of activity.

Could this be described as maybe low hanging fruit?

Well, it's a different kind of fruit.

Let's put it this way.

If you want to draw that kind of analogy, the kind of fruits that we've been primarily pursuing are far from being low hanging.

They require a number of staircases stacked on top of one another, if you get the picture?

So it's a very different kind of effort -- highly focused, very demanding in many ways.

To your point, these other kinds of opportunities correspond to, in effect, the different kind of forest and trees and low-hanging fruits that require a very different approach.

But obviously, within the confines of the brick business model, we have a lot of potential for those kinds of pursuits.

As conditions fall in place, again, I expect to see quite a bit of activity in that general area, which is going to be, I think, complimentary in many ways in terms of balancing [general] business model, in terms of creating a more statistical business pace.

I think that that's going to be a very fruitful development, no pun intended.

We will take one more question.

[John Dylan]

When you talk about customers demanding unique requirements from you, does this lock you in to the production of these chips?

Well, I don't think that in this business there is ever a lock that you can 100% count on.

But let's put it this way.

We're confident that the developments that we have been pursuing, particularly the more significant developments, have the kinds of attributes that would likely lead to a long-term participation in very significant programs.

So we don't expect it to be in one day and out the next day or the next quarter.

I think to the extent that some of these programs we've had design wins that we can, in effect, take to the bank.

And to the extent that in other programs we are still contending for when we may be a strong contender but there's still some potential for negative competitive developments.

To the extent that we win, we will likely win for quite some time.

Thanks and good luck, and thanks for investing in the R&D like you have.

Thank you all for participating.

The next time we will be speaking with you will be the release of Q4 numbers some time at the beginning of February of next year.

Have a good day.

Thank you, sir.

Thank you again, ladies and gentlemen.

This brings your call to a close.

Please feel free to disconnect your lines at any time.

[The applicable company has not participated in nor authorized the preparation of this transcript nor reviewed it for accuracy or otherwise and disclaims all responsibility for any inaccuracies that may appear herein.]